June 01, 2004

It's the Oil, Stupid

George Loves His OilPop quiz hot-shot: what connects the war in Iraq, bombings in Saudi Arabia and a flagging Western Economy? "It's the oil, stupid" - to paraphrase a former President!

More accurately, its the battle for control of the geo-strategically important Middle East and the need of the West for cheap and plentiful oil. The West needs to influence the political and economic climate in the Middle East if it is to secure that supply at a price that is palatable for western consumers. At $42 a barrel today - that price is fast reaching the point where it will have a seriously adverse affect on inflation, growth and unemployment.

Here's the irony though. The more the US tries to exert influence over the region in an aggressive manner, the more likely it is that prices will rise. Prices are rising because of political instability, just as much as high demand. You cannot separate war in the world's third largest oil producing country, and the resulting instability, from oil price rises. Similarly, the West's demands on Saudi Arabia mean that it has become a target of paramilitary action - as seen last week.

This situation will continue in the medium term. Most petrol retailers are predicting a 'normal' per barrel price of $35-40 over the next two years. The solution has to be a more progressive and inclusive policy in the Middle East. This must be a policy that recognises the needs of those countries, rather than trying to impose our values and economic requirements on them.